Japan's COVID-19 response: Crisis met with strong economic package, but is it enough?
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For professional clients only
19 June 2020
Research & Strategy Insights
Japan’s COVID-19 response:
Crisis met with strong
economic package, but is it
enough?
Hugo Le Damany,
Economist (Japan),
Macro Research – Core Investments
Key points The COVID-19 pandemic has resulted in an unprecedented
response from governments and central banks worldwide. In
• Japan’s government has approved a second package of previous papers we have considered the steps the US has
economic measures, totalling some ¥117.1tn (21.5% of taken with fiscal and monetary stimulus to alleviate the shock
GDP), roughly the same as the previous boost adopted in to its economy1 and considered the impact in China2. In this
April. This brings the total package to 43% of GDP piece, we focus on the different measures promoted by the
Japanese government and Bank of Japan (BoJ).
• The headline includes significant contributions from private
sector projects and financial assistance via government- Government’s total package worth 43% of GDP
affiliated financial institutions. It is not obvious how much
these facilities will be used, and they do not constitute
Japan’s government approved a fresh package of economic
direct fiscal spending. Excluding these items, additional
measures, worth ¥117.1tn (21.5% of GDP), roughly the same
spending is a smaller ¥57.6tn, or 10.6% of GDP, boosting
adopted in April. Prime Minister Abe has stressed that while
the deficit by 11 percentage points (ppt) to 14% in 2020
these measures now exceed 40% of GDP, they are designed
• Overall, net direct stimulus would be ¥30.7tn (5.5% of to shield the economy from the impact of the pandemic.
GDP), after we allow for other financial support and They are ultimately aimed at protecting jobs and shoring up
budget reserves. Historic estimates of fiscal multipliers individuals and companies that are struggling financially.
suggest an impact of 2.6 percentage points of GDP
However, the headline figure includes a significant amount of
• The Bank of Japan has strengthened its monetary policy private sector projects. These include spending by local
to support the government’s action. It is likely to use its governments and municipalities, previously approved and
Yield Curve Control policy extensively, reducing the risks repackaged expenditures, and assistance via government-
of rising financing costs. In parallel, it has promoted affiliated financial institutions and other entities. Excluding
targeted measures to ensure smooth credit provisions these items and the Fiscal Investment and Loan Program
throughout the banking sector.
1 2
Page, D., “COVID-19 Update – US policy response”, AXA IM Macro Yao, A., “China: Fuelling recovery with an extra policy kick”, AXA IM Macro
Research, 3 June 2020 Research, 9 June 2020.
1(FILP)3, the actual spending in the supplementary budget account for these measures as loans will be subject to
approximates ¥57.6tn or 10.6% of GDP (Exhibit 1). uncertain demand – making estimating the quantity involved
difficult – as they must ultimately be reimbursed. Only
Exhibit 1: Summary of COVID-19 economic packages interest rate and guarantees are direct costs to government,
¥ tn (% of GDP) April package June package Total but the former are close to 0%, while the latter is difficult to
117.1 117.1 forecast. This scheme may indeed boost lending and we will
Total programme size 234.2 (43%)
(21.5%) (21.5%) monitor activity under these schemes, but we do not
Total gov. fiscal consider them to be direct fiscal stimulus.
48.4 72.7 121.1
contribution (including
(8.9%) (13.3%) (22.2%)
FILP) Overall, net fiscal stimulus is therefore just ¥30.7tn (5.5% of
Central gov. general
25.7 31.9 57.6 GDP), after allowing for additional financial support and the
account expenditures
(4.7%) (5.9%) (10.6%) additional increase in budget reserves – a buffer for future
(bond issuance)
Source: Ministry of Finance spending – from the supplementary budgets (Exhibit 2).
The supplementary budget includes: April’s budget has seen significant delays in providing the
urgently needed cash payments and employment adjustment
- The Employment Adjustment Subsidy Program (EASP)’s subsidies that it promised. This raises concerns about how
daily subsidy has been doubled to ¥15,000 ($150) and quickly funds will materialise from this second package.
extended to September 2020. In a previous paper4, we
highlighted the impact of the EASP, which heavily Exhibit 2: Fiscal stimulus and timing of implementation
subsidises companies that furlough workers, rather than Japan - Timing of stimulus implementation
cutting their jobs ¥ tn Support for supply-chain restruct. & SMEs' digitalization
20
- A monthly cash handout of ¥330,000 ($3,300) to Recovery fund
individuals working at small- and medium-sized Tax grants to local government
15 Rent support
enterprises (SMEs) who have been furloughed, but not Cash handouts - Households
integrated to the EASP programme Employment Adjustment Subsidy Program
- One-off payment of ¥100,000 ($1,000) for each citizen, Cash handouts - SMEs
10
Medical
totalling ¥12.9tn and ¥200,000 for health care workers.
- Cash handouts for SMEs that have been heavily impacted
5
during the crisis where sales have dropped by half or
more. The maximum an SME will get is ¥2m ($18,700)
and self-employed ¥1m from a total package of ¥4.2tn - 0
Q2 Q3 Q4
0.8% of GDP
Source: Cabinet Office and AXA IM Research, as of June 2020
- Offering rent relief for struggling firms of up to two-thirds
rent subsidy of ¥1m for six months at maximum Academic literature suggests that Japanese fiscal multipliers
- Beefing up medical response (¥4.8tn) differ depending on where they are directed. Historically, only
- Tax grant to local government of ¥2tn public investment has had a high multiplier (above one). Direct
- Building a strong economic structure – support supply- payments to households – cash payments and wage
chain restructuring and SME’s digitalisation - with ¥0.9tn. supplements – saw a relatively low multiplier (0.3) in 2009.
The government is leveraging on FILP and the private We assume this experience will be repeated. For corporates,
sector to reach ¥15tn, invested over several years the Cabinet Office uses a multiplier of 0.4. There will also be a
- Reviving the economy in the recovery phase (vouchers) lag between disbursement and spending, particularly for
for ¥1.8tn capital projects and we only expect elements, including in the
- ¥11.5tn has been set aside as a budget reserve fund to be modernisation plan – supply-chain restructuring and
used in case of emergency spending digitalisation – to provide a small impact this year. By
applying the appropriate fiscal multipliers, we estimate an
Finally, the government provides interest-free and unsecured impact of 2.6ppt of GDP in 2020 and approximately 3ppt
loans for up to five years to affected SMEs. The budget from the investment plan but spread over several years
includes ¥13tn to cover the costs of interest and guarantees, (Exhibit 3).
as well as potential losses from loans to be extended (see
below). It also includes a measure to raise the upper limit of a
possible capital injection (¥2.4tn or 0.4% of GDP). We do not
3 4
The Fiscal Investment and Loan Program (FILP) in Japan collects funds Page, D., Yao, A., Menut, A. and Le Damany, H., “COVID-19 Update: Labour
through government financial institutions and uses them to finance public market deterioration to dampen rebound”, AXA IM Research, 7 May 2020
projects undertaken by government affiliated corporations or to finance
government loans to borrowers in targeted areas. It includes also the
government guarantees scheme.
2Exhibit 3: Fiscal stimulus and impact on GDP namely jobs and companies. Recovery will depend a lot on
demand. We believe the government will focus on consumption
and investment in a third supplementary budget.
Bank of Japan’s monetary policy supporting
government stimulus
The actual government spending in the supplementary budgets
(¥57.6tn) will be fully debt funded. This large increase in
Japanese government bond (JGB) issuance could put upward
pressure on financing costs. However, BoJ policy should
directly curb yield increases, through its Yield Curve Control
policy (fixing the JGB 10-year yield around 0%). Moreover,
Source: Cabinet Office and AXA IM Research, as of June 2020 should current purchases exceed the official guideline (¥14tn
versus ¥80tn), the BoJ has removed its annual purchases
In total, we continue to believe GDP growth is going to fall by target, suggesting a more flexible approach to purchases and
5.8% in 2020 and rebound to 3.3% in 2021. Fiscal deficit is a willingness to backstop government action.
likely to rise by 11ppt to 14% in 2020.
On the other aspect of the quantitative easing, the BoJ
Financial assistance: Welcome to the jungle doubled its target amount of exchange-traded funds and
Japanese Real Estate Investment Trusts annual purchases to
Financial assistance remains the core government ¥12tn and ¥0.18tn respectively (Exhibit 4).
intervention even if it appears to overstate its impact on the
economy. It is difficult to unscramble the detail in financial Exhibit 4: BoJ’s balance sheet increased sharply since
assistance. But it seems that among the figures announced March
by PM Abe, approximately 80% of the ¥234tn would be Bank of Japan's Balance sheet- Assets
“financial assistance” – loans from the private-sector and 120% % of GDP
loan guarantees from public financial institutions such as the 110%
FILP and other policy banks and deferred tax payments. 100%
90%
80%
The only figure we are sure about is the ¥15.7tn detailed in 70%
the supplementary budget. The rest is rather opaque. 60%
50%
40%
- Total government fiscal contributions (including FILP and 30%
policy banks) account for half of the economic package, 20%
meaning the government is expecting the other half to 10%
0%
come from the private sector – at ¥113.1tn or 21% of
Sep-16
Sep-18
Sep-14
Sep-15
Sep-17
Sep-19
Jan-14
May-15
Jan-16
May-16
Jan-17
May-18
May-20
May-14
Jan-15
May-17
Jan-18
Jan-19
May-19
Jan-20
GDP (Exhibit 1). Most of this constitutes loans for affected
companies. The government will subsidise and guarantee Others ETF
a share of these loans, but private banks will carry the Corporate bonds+J-REIT Gold+Cash+Foreign currency
Japanese Government securities Asset - Total in % of GDP
burden on their own balance sheets Source: BoJ and AXA IM Research, as of June 2020.
- Outside the government account, there are loans and loan
guarantees from public financial institutions such as the FILP On liquidity measures, the BoJ provided one-week and three-
and other policy banks. These include interest-free rates months dollar liquidity to financial institutions associated with
and unsecured loans to affected companies (mainly SMEs) other major central banks. Following changes by the US Federal
using both policy banks and private financial institutions Reserve, the lending rate was cut by 25 basis points (bps) and
- In parallel, the government is also leveraging on both the the new rate was the US Overnight Index swap rate plus 25bps.
private and public sectors to participate in some measures
such as the recovery plan or the reconstruction of the Board members do not appear ready to go deeper into
supply chain negative interest rate policy (NIRP). Deeper negative interest
- Finally, the government has deferred tax payments to rates could put additional pressure on commercial bank
next year for SMEs and individual businesses heavily lending and the BoJ needs buoyant commercial banks to
affected. This measure may reach ¥26tn implement credit measures. Moreover, this could weigh on
household sentiment. Adjustments to forward guidance
As mentioned earlier, the government moved quickly and provide the BoJ with some room for manoeuvre on this front,
massively to protect key pillars of the Japanese economy, as the policy rate path has been untied from inflation
3momentum. On balance, we consider that the BoJ has But even with the BoJ’s existing measures, prolonged low
probably admitted having hit the lower bound of the NIRP. growth may tighten funding conditions, potentially eroding
financial system resilience and impeding credit provision.
Alleviating the burden on commercial banks
The BoJ’s latest Financial System Report (April 2020) includes
At the peak of the crisis, the BoJ increased its purchases of a stress test, assuming a global financial crisis scale shock.
commercial paper and corporate bonds up to a maximum of The COVID-19 demand shock is larger, but the impact on
around ¥20tn, but it didn’t stop here. As the lockdown eases, financial markets – stock prices, yen appreciation and cost of
continued low growth could weaken the banking system’s funding in foreign currencies - has been less severe. Assuming
credit intermediation, meaning that the BoJ’s incentives in no growth for two years, the simulation results indicate that
credit supply are crucial: banks’ net incomes would fall substantially and remain negative
for three years with capital adequacy ratios declining in
- A “Special Funds-Supplying Operations to Facilitate parallel. However, key capital ratios would remain above the
Financing in Response to the Novel Coronavirus” which regulatory requirements on average at 8% for internationally
supplied funds against private debt pledged as collateral active banks and 4% for domestic banks (Exhibit 6).
for a maximum amount of around ¥25tn as of end-April
- The interest rate is 0% on these funds with maturity of up Exhibit 6: The BoJ’s Financial System Report points to
to one year. Additionally, twice as much as the current the relative resilience of the Japanese banking sector in
amount outstanding of the loans will be included in the a global financial crisis-scale shock stress test.
Macro Add-on Balances in current accounts held by financial Japan - Impact on bank capital of a GFC-scale shock
institutions at the BoJ (the middle tier at 0% in the tiering - Internationally active banks
20%
system), while a positive interest rate (+0.1%) will be
applied to the amounts outstanding of loans provided
- The BoJ designed a new fund-provisioning measure for 15%
CET1 capital ratio in %
SMEs (around ¥30tn). The central bank will pay 0.1%
interest on the loans to encourage lenders 10%
- Credit measures have been extended until end-March
2021 (from end-September 2020) Baseline
5%
Great Financial Crisis shock
On the regulatory side, the authorities have agreed to defer
full implementation of the Basel III standards by one year and 0%
2018 2019 2020 2021 2022
have encouraged banks to use their regulatory capital and
Source: BoJ, Financial System Report and AXA IM Research, as of April 2020.
liquidity buffers. Similarly, in early April, the Financial Services
Agency and the BoJ announced an easing of regulations on Looking ahead
leverage ratios.
Alongside other international authorities, the Japanese
Up to now, credit provision to firms has been relatively
government and BoJ have implemented a bewildering array
smooth given the size of the economic shock, reflecting both
of new measures designed to support key economic pillars.
government and central bank easing policies (Exhibit 5).
PM Abe has described a package in excess of 40% of GDP.
While true, we consider this description as misleading in
Exhibit 5: Bank lending has risen sharply in May terms of the amount of support it will ultimately provide to
Japanese Bank lending - Banks and Shinkin banks
the economy. To our minds, much of this 43% is hard to
6% %yoy
quantify as it will depend on demand for borrowing. This
5%
4%
could add to total stimulus and we will monitor progress in
3% lending over the coming quarters. Otherwise, we estimate
2% that the direct spending commitment from the Japanese
1% government will total around 5% to 6% of GDP. Based on
0% historic estimates of fiscal multipliers, this would bolster GDP
-1%
growth by 2.6ppt in 2020 and 3.3% % in 2021.
-2%
-3%
Finally, the BoJ has been active in providing liquidity and ensuring
06/2005
03/2006
12/2006
09/2007
12/2009
09/2010
06/2011
06/2014
03/2015
12/2015
03/2018
12/2018
09/2019
06/2008
03/2009
03/2012
12/2012
09/2013
09/2016
06/2017
that the economic shock does not morph into a financial one.
It has provided modest further accommodation in terms of
Source: BoJ, Senior Loan Officers survey and AXA IM Research, as of May 2020
monetary policy, but we tend to the view that the BoJ’s biggest
contribution beyond financial stability will be to cap any
upward pressure on yields to facilitate further fiscal stimulus.
4For professional clients only
19 June 2020
Research & Strategy Insights
Our Research is available on line: http://www.axa-im.com/en/insights
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